Question 7.17

12. The accompanying table presents prices for washing and ironing a man’s shirt taken from a survey of California dry cleaners.

Dry cleaner City Price
A-1 Cleaners Santa Barbara $1.50
Regal Cleaners Santa Barbara 1.95
St. Paul Cleaners Santa Barbara 1.95
Zip Kleen Dry Cleaners Santa Barbara 1.95
Effie the Tailor Santa Barbara 2.00
Magnolia Too Goleta 2.00
Master Cleaners Santa Barbara 2.00
Santa Barbara Cleaners Goleta 2.00
Sunny Cleaners Santa Barbara 2.00
Casitas Cleaners Carpinteria 2.10
Rockwell Cleaners Carpinteria 2.10
Norvelle Bass Cleaners Santa Barbara 2.15
Ablitt’s Fine Cleaners Santa Barbara 2.25
California Cleaners Goleta 2.25
Justo the Tailor Santa Barbara 2.25
Pressed 4 Time Goleta 2.50
King’s Cleaners Goleta 2.50

  1. What is the average price per shirt washed and ironed in Goleta? In Santa Barbara?

  2. Draw typical marginal cost and average total cost curves for California Cleaners in Goleta, assuming it is a perfectly competitive firm but is making a profit on each shirt in the short run. Mark the short-run equilibrium point and shade the area that corresponds to the profit made by the dry cleaner.

  3. Assume $2.25 is the short-run equilibrium price in Goleta. Draw a typical short-run demand and supply curve for the market. Label the equilibrium point.

  4. Observing profits in the Goleta area, another dry cleaning service, Diamond Cleaners, enters the market. It charges $1.95 per shirt. What is the new average price of washing and ironing a shirt in Goleta? Illustrate the effect of entry on the average Goleta price by a shift of the short-run supply curve, the demand curve, or both.

  5. Assume that California Cleaners now charges the new average price and just breaks even (that is, makes zero economic profit) at this price. Show the likely effect of the entry on your diagram in part b.

  6. If the dry cleaning industry is perfectly competitive, what does the average difference in price between Goleta and Santa Barbara imply about costs in the two areas?